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MarketScreener Homepage  >  Equities  >  Nyse  >  Great Western Bancorp, Inc.    GWB

GREAT WESTERN BANCORP, INC.

(GWB)
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GREAT WESTERN BANCORP : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

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02/05/2020 | 04:41pm EDT
The historical consolidated financial data discussed below reflects our
historical results of operations and financial condition and should be read in
conjunction with our financial statements and related notes thereto presented
elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form
10-K for the fiscal year ended September 30, 2019, previously filed with the
SEC. In addition to historical financial data, this discussion includes certain
forward-looking statements regarding events and trends that may affect our
future results. Such statements are subject to risks and uncertainties that
could cause our actual results to differ materially. See "Cautionary Note
Regarding Forward-Looking Statements." For a more complete discussion of the
factors that could affect our future results, see "Item 1A. Risk Factors" in our
Annual Report on Form 10-K for the fiscal year ended September 30, 2019.
Any discrepancies included in this filing between totals and the sums of
percentages and dollar amounts presented, or between rounded dollar amounts, are
due to rounding.
Unless otherwise noted, references to "the current period" or "the current
quarter" refer to the fiscal quarter ended December 31, 2019 and references to
"the comparable period" or "the comparable quarter" refer to the fiscal quarter
ended December 31, 2018.
Tax Equivalent Presentation
All references to net interest income, net interest margin, interest income on
non-ASC 310-30 loans, yield on non-ASC 310-30 loans and the related non-GAAP
adjusted financial measure of each item are presented on a FTE basis unless
otherwise noted.
Overview
We are a full-service regional bank holding company focused on
relationship-based business and agri-business banking. We serve our customers
through 175 branches in attractive markets in nine states: Arizona, Colorado,
Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota and South Dakota.
Our Bank was established more than 80 years ago and we have achieved strong
market positions by developing and maintaining extensive local relationships in
the communities we serve. By leveraging our business and agri-business focus,
presence in attractive markets, highly efficient operating model and robust
approach to risk management, we have achieved significant and profitable
growth-both organically and through disciplined acquisitions. We provide
financial results based on a fiscal year ending September 30 as a single
reportable segment.
The principal sources of our revenues and cash flows are: (i) interest and fees
earned on loans made or held by our Bank; (ii) interest on fixed income
investments held by our Bank; (iii) fees on wealth management services; (iv)
service charges on deposit accounts maintained at our Bank; (v) gain on the sale
of loans held for sale (vi) gains on sales of securities; and (vii) merchant and
card fees. Our principal expenses are: (i) interest expense on deposit accounts
and other borrowings; (ii) salaries and employee benefits; (iii) data processing
and communication costs primarily associated with maintaining our Bank's loan
and deposit functions; (iv) occupancy expenses for maintaining our Bank's
facilities; (v) professional fees, including FDIC insurance assessments; (vi)
business development; and (vii) other real estate owned expenses. The largest
component contributing to our net income is net interest income, which is the
difference between interest earned on earning assets (primarily loans and
investments) and interest paid on interest-bearing liabilities (primarily
deposit accounts and other borrowings). One of management's principal functions
is to manage the spread between interest earned on earning assets and interest
paid on interest-bearing liabilities in an effort to maximize net interest
income while maintaining an appropriate level of interest rate risk.
Highlights for the Three Months Ended December 31, 2019
Net income was $43.3 million, or $0.77 per diluted share, for the first quarter
of fiscal year 2020, compared to $45.8 million, or $0.79 per diluted share, for
the same period in fiscal year 2019, a decrease of $2.5 million, or 5.5%. The
decline in net income in the current quarter was due to lower loan interest
income as a result of a drop in average loans outstanding, combined with a $2.0
million net reversal of interest income on loans moved to nonaccrual during the
quarter, partially offset by a 20 basis point decrease in the cost of deposits.
Credit-related charges also increased, mainly in the agriculture and commercial
non-real estate loan portfolios. Our efficiency ratio was 46.2% and 46.1% for
the first quarter of fiscal year 2020 and 2019, respectively. For more
information on our efficiency ratio, including a reconciliation to the most
directly comparable GAAP financial measure, see "-Non-GAAP Financial Measures"
section.
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Net interest margin, which measures our ability to maintain interest rates on
interest earning assets above those of interest bearing liabilities, was 3.68%,
3.70% and 3.81%, respectively, for the three months ended December 31, 2019,
September 30, 2019 and December 31, 2018. Adjusted net interest margin, which
reflects the realized gain (loss) on interest rate swaps, was 3.65%, 3.69% and
3.81%, respectively, for the same periods. We believe our adjusted net interest
margin is more representative of our underlying performance and is the measure
we use internally to evaluate our results. Net interest margin and adjusted net
interest margin decreased by 13 and 16 basis points, respectively, compared to
the same quarter in fiscal year 2019. Net interest margin decreased between the
two periods primarily due to the yield on loans, which included a 7 basis point
reduction in net interest margin due to the net reversal of interest income
noted above, partially offset by a 9 basis point decrease in the cost of
deposits to 0.86%. A $0.9 million increase in the current quarter of the cost of
interest rate swaps compared to the same period in fiscal year 2019 is the
primary driver of the more pronounced decrease in adjusted net interest margin
compared to the decrease in net interest margin. For more information on our
adjusted net interest margin, including a reconciliation to the most directly
comparable GAAP financial measure, see "-Non-GAAP Financial Measures" section.
Total loans were $9.63 billion at December 31, 2019 compared to $9.71 billion at
September 30, 2019, a decrease of $80.5 million, or 0.8%. The decline in loans
during the quarter was mainly attributable to the commercial non-real estate
segment of the portfolio, which decreased by $43.5 million, or 2.5%, due to
disbursement transaction timing within our mortgage warehouse lending, a
reduction in the agriculture segment of $28.0 million, or 1.4%, primarily due to
the workout of a small number of large relationships, and a decrease of $7.7
million, or 0.2%, in CRE impacted by a number of loans refinancing with other
institutions due to lower rates.
Deposits were $10.09 billion at December 31, 2019, a decrease of $211.8 million,
or 2.1%, compared to $10.30 billion at September 30, 2019, due to a reduction in
the use of brokered deposits offset by increases in both consumer and business
deposits. Interest-bearing deposits were $8.06 billion, a 3.4% decrease, and
noninterest-bearing deposits were $2.03 billion, a 3.8% increase, compared to
September 30, 2019. FHLB and other borrowings increased by $235.0 million, or
69.1%, as a result of more favorable rates during the quarter.
At December 31, 2019, nonaccrual loans, including ASC 310-30 loans, were $156.1
million, an increase of $48.9 million, or 45.6%, compared to September 30, 2019,
related primarily to a small number of agriculture loans identified as we
continue to work through the higher risk credits. Loans graded "Watch" were
$416.3 million, an increase of $10.7 million, or 2.6%, compared to September 30,
2019 while loans graded "Substandard" were $640.1 million, an increase of $167.6
million, or 35.5%, over the same period. The increase in loans graded
"Substandard" was primarily due to downgrades in the agriculture and
agriculture-related commercial non-real estate segments, with a small number of
downgrades in the commercial non-real estate segment. Total other repossessed
property balances were $39.5 million as of December 31, 2019, an increase of
$2.7 million, or 7.4%, compared to September 30, 2019.
Provision for loan and lease losses was $8.1 million for the first quarter of
fiscal year 2020, compared to $5.2 million for the same period of fiscal year
2019, an increase of $2.9 million, or 55.4%. Net charge-offs for the first
quarter of fiscal year 2020 were $6.1 million, or 0.25% of average total loans
on an annualized basis, compared to net charge-offs of $3.6 million, or 0.15% of
average total loans on an annualized basis for the comparable period in fiscal
year 2019, with the majority of net charge-offs concentrated in the agriculture
and commercial non-real estate segments of the loan portfolio. The ratio of ALLL
to total loans was 0.76% at December 31, 2019 compared to 0.73% at September 30,
2019. The balance of the ALLL increased to $72.8 million at December 31, 2019
from $70.8 million at September 30, 2019.
Tier 1 capital, total capital and Tier 1 leverage ratios were 12.0%, 13.0% and
10.4%, respectively, at December 31, 2019, compared to 11.7%, 12.7% and 10.1%,
respectively, at September 30, 2019. In addition, our Common Equity Tier 1 ratio
was 11.3% and 11.0% at December 31, 2019 and September 30, 2019, respectively.
Our tangible common equity to tangible assets ratio was 9.7% at December 31,
2019 and 9.6% at September 30, 2019. All regulatory capital ratios remain above
regulatory minimums to be considered "well capitalized". For more information on
our tangible common equity to tangible assets ratio, including a reconciliation
to the most directly comparable GAAP financial measure, see "-Non-GAAP Financial
Measures" section.
Key Factors Affecting Our Business and Financial Performance
As discussed in our Annual Report on Form 10-K for the fiscal year ended
September 30, 2019, our financial performance is impacted by a number of
external factors outside our control, as well as our ability to execute on the
key components of our strategy for continued success and future growth. There
have been no material changes to these factors or key components of our strategy
except as otherwise supplemented within this Quarterly Report on Form 10-Q for
the quarterly period ended December 31, 2019.
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Results of Operations-Three Months Ended December 31, 2019 and 2018
Overview
The following table highlights certain key financial and performance information
for the three months ended December 31, 2019 and 2018.
                                                                Three Months Ended December 31,
                                                                  2019                   2018
                                                            (dollars in thousands, except share and
                                                                      per share amounts)
Operating Data:
Interest income (FTE)                                       $     133,060$     133,551
Interest expense                                                   26,364                 27,167
Noninterest income                                                 15,733                 16,720
Noninterest expense                                                56,930                 57,106
Provision for loan and lease losses                                 8,103                  5,215
Net income                                                         43,274                 45,786

Common shares outstanding                                      56,382,915             56,938,435
Weighted average diluted common shares outstanding             56,457,967   

58,039,292

Earnings per common share - diluted                         $        0.77

$ 0.79


Performance Ratios:
Net interest margin (FTE) ¹ ²                                        3.68  %                3.81  %
Adjusted net interest margin (FTE) ¹ ²                               3.65  %                3.81  %
Return on average total assets ²                                     1.34  %                1.48  %
Return on average common equity ²                                     9.0  %                10.0  %
Return on average tangible common equity ¹ ²                         15.0  %                17.1  %
Efficiency ratio ¹                                                   46.2  %                46.1  %
1 This is a non-GAAP financial measure we believe is helpful to interpreting our financial results.
For more information on this non-GAAP financial measure, including a reconciliation to the most
directly comparable GAAP financial measure, see "-Non-GAAP Financial Measures" section.
2 Annualized for all partial-year periods.


Net Interest Income
The following table presents net interest income, net interest margin and
adjusted net interest margin for the three months ended December 31, 2019 and
2018.
                                                                        

Three Months Ended December 31,

                                                                          2019                        2018
                                                                            (dollars in thousands)
Net interest income:
Total interest income (FTE)                                    $          133,060               $     133,551
Less: Total interest expense                                               26,364                      27,167
Net interest income (FTE)                                      $          106,696               $     106,384

Net interest margin (FTE) and adjusted net interest margin (FTE) ¹ Average interest-earning assets

                                $       11,543,610$  11,086,800
Average interest-bearing liabilities                                   10,804,123                  10,382,172
Net interest margin (FTE)                                                    3.68       %                3.81  %
Adjusted net interest margin (FTE) ¹                                         3.65       %                3.81  %
1 This is a non-GAAP financial measure we believe is helpful to interpreting our financial results. For more
information on this non-GAAP financial measure, including a reconciliation to the most directly comparable GAAP
financial measure, see "-Non-GAAP Financial Measures" section.


Net interest income was $106.7 million for the first quarter of fiscal year
2020, compared to $106.4 million for the same period in fiscal year 2019, an
increase of $0.3 million, or 0.3%. The increase in net interest income was
primarily attributable to lower interest expense associated with
interest-bearing deposits offset by a $2.0 million net reversal of interest
income on loans moved to nonaccrual during the quarter.
Net interest margin was 3.68% and 3.81% for the first quarter of fiscal year
2020 and 2019, respectively, a decrease of 13 basis points, while the adjusted
net interest margin was 3.65% and 3.81% for the first quarter of fiscal year
2020 and 2019, respectively, a decrease of 16 basis points. The decrease in net
interest margin for the quarter was primarily driven by the yield on loans,
which included a 7 basis point reduction in net interest margin due to the net
reversal of interest income noted above, partially offset by a 9 basis point
decrease in the cost of deposits to 0.86%. A $0.9 million increase in the cost
of interest rate swaps between the three month period in fiscal year 2020 and
the comparable period in fiscal year 2019 is the primary driver for the more
pronounced decrease in adjusted net interest margin compared to the decrease in
net interest margin. For more
                                      39-
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information on our adjusted net interest margin, including a reconciliation to
the most directly comparable GAAP financial measure, see "-Non-GAAP Financial
Measures" section.
The following tables present the distribution of average assets, liabilities and
equity, interest income and resulting yields on average interest-earning assets,
and interest expense and rates on average interest-bearing liabilities for the
current and comparable three month periods, respectively. Loans on nonaccrual
status that had interest accrued as of the date of nonaccrual are immediately
reversed as a reduction to interest income, while any interest subsequently
recovered is recorded in the period of recovery. Tax-exempt loans and
securities, totaling $750.1 million at December 31, 2019 and $749.8 million at
December 31, 2018, are typically entered at lower interest rate arrangements
than comparable non-exempt loans and securities. The amount of interest income
reflected in the following table has been adjusted to include the amount of tax
benefit realized in the period and as such is presented on a fully-tax
equivalent basis, the calculation of which is outlined in the discussion of
non-GAAP items later in this section. ASC 310-30 loans represent loans accounted
for in accordance with ASC 310-30, Accounting for Purchased Loans, that were
credit impaired at the time we acquired them. Non-ASC 310-30 loans represent
loans we have originated and loans we have acquired that were not credit
impaired at the time we acquired them.
                                                                                            Three Months Ended
                                                             December 31, 2019                                                                   December 31, 2018
                                                Average          Interest       Yield / Cost                                                   Yield / Cost
                                               Balance            (FTE)              ¹                  Average Balance      Interest (FTE)         ¹
                                                                                          (dollars in thousands)

Assets

Interest-bearing bank deposits ²            $       32,803$       608              7.37   %       $          91,780    $           541            2.34  %
Investment securities                            1,904,350          11,498              2.40   %               1,491,285              9,189            2.44  %
Non-ASC 310-30 loans, net ³                      9,554,161         119,232              4.96   %               9,435,901            121,851            5.12  %
ASC 310-30 loans, net                               52,296           1,722             13.10   %                  67,834              1,970           11.52  %
Loans, net                                       9,606,457         120,954              5.01   %               9,503,735            123,821            5.17  %
Total interest-earning assets                   11,543,610         133,060              4.59   %              11,086,800            133,551            4.78  %
Noninterest-earning assets                       1,267,983                                                     1,186,821
Total assets                                $   12,811,593$   133,060              4.13   %       $      12,273,621$       133,551            4.32  %
Liabilities and Stockholders' Equity
Noninterest-bearing deposits                $    1,977,084$       1,865,295
Interest-bearing deposits                        6,306,861     $    13,373              0.84   %               6,148,755    $        15,736            1.02  %
Time deposits                                    1,847,954           8,567              1.84   %               1,937,295              8,058            1.65  %
Total deposits                                  10,131,899          21,940              0.86   %               9,951,345             23,794            0.95  %
Securities sold under agreements to
repurchase                                          66,527              31              0.19   %                  79,849                 57            0.28  %
FHLB advances and other borrowings                 497,034           3,082              2.47   %                 242,495              1,946            3.18  %
Subordinated debentures and subordinated
notes payable                                      108,663           1,311              4.80   %                 108,483              1,370            5.01  %
Total borrowings                                   672,224           4,424              2.62   %                 430,827              3,373            3.11  %
Total interest-bearing liabilities              10,804,123     $    26,364              0.97   %              10,382,172    $        27,167            1.04  %
Noninterest-bearing liabilities                     98,951                                                        74,397
Stockholders' equity                             1,908,519                                                     1,817,052
Total liabilities and stockholders' equity  $   12,811,593$      12,273,621
Net interest spread                                                                     3.16   %                                                       3.28  %
Net interest income and net interest margin
(FTE)                                                          $   106,696              3.68   %                            $       106,384            3.81  %
Less: Tax equivalent adjustment                                      1,523                                                            1,490
Net interest income and net interest margin
- ties to Statements of Comprehensive
Income                                                         $   105,173              3.62   %                            $       104,894            3.75  %
¹ Annualized for all partial-year periods.
2 Interest income includes $0.4 million and $0.0 million for the first quarter of fiscal years 2020 and 2019, respectively, resulting from interest earned on
derivative collateral included in other assets on the consolidated balance sheets.
3 Interest income includes $0.6 million and $0.4 million for the first quarter of fiscal years 2020 and 2019, respectively, resulting from accretion of
purchase accounting discount associated with acquired loans.





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Interest Income
The following table presents interest income for the three months ended
December 31, 2019 and 2018.
                                         Three Months Ended December 31,
                                         2019                           2018
                                              (dollars in thousands)
Interest income:
Loans (FTE)                       $       120,954$ 123,821
Investment securities                      11,498                       9,189
Federal funds sold and other                  608                         541
Total interest income (FTE)               133,060                     133,551
Less: Tax equivalent adjustment             1,523                       1,490
Total interest income (GAAP)      $       131,537$ 132,061


Total interest income consists primarily of interest income on loans and
interest income on our investment portfolio. Total interest income was $133.1
million for the first quarter of fiscal year 2020, compared to $133.6 million
for the same period of fiscal year 2019, a decrease of $0.5 million, or 0.4%.
Significant components of interest income are described in further detail below.
Loans. Interest income on all loans decreased to $121.0 million in first quarter
of fiscal year 2020 from $123.8 million in the same period in fiscal year 2019,
a decrease of $2.8 million, or 2.3%. The decrease was primarily attributable to
lower loan interest income driven by a $2.0 million net reversal of interest
income on loans moved to nonaccrual during the quarter. For the three months
ended December 31, 2019, interest income on ASC 310-30 loans, which are
purchased credit impaired loans with a different income recognition model,
decreased $0.2 million, or 12.6%, primarily driven by runoff of the acquired
loan portfolios.
Our yield on loans is affected by market interest rates, the level of
adjustable-rate loan indices, interest rate floors and caps, customer repayment
activity, the level of loans held for sale, portfolio mix, and the level of
nonaccrual loans. The average tax equivalent yield on non-ASC 310-30 loans was
4.96% for the first quarter of fiscal year 2020, a decrease of 16 basis points
compared to the same period in fiscal year 2019. Adjusted for the current
realized gain (loss) on derivatives we use to manage interest rate risk on
certain of our loans at fair value, which we believe represents the underlying
economics of the transactions, the adjusted yield on non-ASC 310-30 loans was
4.93% for the first quarter of fiscal year 2020, a 19 basis point decrease
compared to the same period in fiscal year 2019. For more information on our
adjusted yield on non-ASC 310-30 loans, including a reconciliation to the most
directly comparable GAAP financial measure, see "-Non-GAAP Financial Measures"
section.
The average duration, net of interest rate swaps, of the loan portfolio was 1.3
years as of December 31, 2019. Approximately 48%, or $4.55 billion, of the
portfolio is comprised of fixed rate loans, of which $772.2 million of loans are
fixed rate loans with an original term of 5 years or greater for which we have
entered into equal and offsetting fixed-to-floating interest rate swaps. These
loans effectively behave as floating rate loans. For floating and variable rate
loans in the portfolio, approximately 40% are indexed to Wall Street Journal
Prime, 29% to 5-year Treasuries and the balance to various other indices.
Approximately 8% of our total loans' rates are floored, with an average interest
rate floor 46 basis points above market rates as of December 31, 2019.
Loan-related fee income of $2.3 million is included in interest income for the
first quarter of fiscal year 2020 compared to $1.4 million for the same period
in fiscal year 2019. In addition, certain fees collected at loan origination are
considered to be a component of yield on the underlying loans and are deferred
and recognized into income over the life of the loans. Amortization related to
the FDIC indemnification assets of $0.3 million and $0.5 million for the first
quarter of fiscal years 2020 and 2019, respectively, is included as a reduction
to interest income.
Investment Portfolio. The carrying value of investment securities and FHLB stock
was $1.94 billion as of December 31, 2019. Interest income on investments
includes income earned on investment securities and FHLB stock. Interest income
on investments was $11.5 million for the first quarter of fiscal year 2020, an
increase of $2.3 million, or 25.1%, from $9.2 million for the same period in
fiscal year 2019, driven by an increase in average investment balance of $413.1
million, or 27.7%. partially offset by a yield decrease to 2.40% from 2.44% for
the same periods.
The weighted average life of the investment portfolio was 3.9 and 3.7 years at
December 31, 2019 and September 30, 2019, respectively. Average investments
represented 16.5% and 13.5% of total average interest-earning assets for the
first quarter of fiscal years 2020 and 2019, respectively.
                                      41-
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Interest Expense
The following table presents interest expense for the three months ended
December 31, 2019 and 2018.
                                                                Three Months Ended December 31,
                                                                  2019                     2018
                                                                     (dollars in thousands)
Interest expense
Deposits                                                   $        21,940$      23,794
FHLB advances and other borrowings                                   3,113                   2,003
Subordinated debentures and subordinated notes payable               1,311                   1,370
Total interest expense                                     $        26,364$      27,167


Total interest expense consists primarily of interest expense on three
components: deposits, FHLB advances and other borrowings, and our outstanding
subordinated debentures and subordinated notes payable. Total interest expense
decreased $0.8 million, or 3.0%, to $26.4 million in the first quarter of fiscal
year 2020, from $27.2 million in the same period in fiscal year 2019.
Significant components of interest expense are described in further detail
below.
Deposits. Interest expense on deposits, consisting of interest-bearing accounts
and time deposits, was $21.9 million and $23.8 million for the first quarter of
fiscal years 2020 and 2019, respectively, a decrease of $1.9 million, or 7.8%.
The decrease was a result of decreasing interest rates in the cost of deposits.
Average deposit balances increased to $10.13 billion for the first quarter of
fiscal year 2020, from $9.95 billion for the comparable period in fiscal year
2019, an increase of $180.6 million, or 1.8%. The cost of deposits decreased to
0.86% for the first quarter of fiscal year 2020 from 0.95% for the same period
of fiscal year 2019.
Average noninterest-bearing demand account balances increased to 19.5% of
average total deposits for the first quarter of fiscal year 2020 from 18.7% for
the comparable period in fiscal year 2019. Total average other liquid accounts,
consisting of interest-bearing demand deposits, increased to 62.2% of total
average deposits for the first quarter of fiscal year 2020, compared to 61.8% of
total average deposits for the comparable period in fiscal year 2019, while time
deposit accounts decreased to 18.2% of average total deposits for the first
quarter of fiscal year 2020, compared to 19.5% in the comparable period in
fiscal year 2019.
FHLB Advances and Other Borrowings. Interest expense on FHLB advances and other
borrowings was $3.1 million for the first quarter of fiscal year 2020, an
increase of $1.1 million, or 55.4%, compared to $2.0 million for the comparable
period in 2019, reflecting a weighted average cost of 2.47% and 3.18%,
respectively, for the same periods. The average balance of FHLB advances and
other borrowings was $497.0 million for the first quarter of fiscal year 2020
compared to $242.5 million for the same period in fiscal year 2019. The average
rate paid on FHLB advances is impacted by market rates and the various terms and
repricing frequency of the specific outstanding borrowings in each year. The
weighted average contractual rate paid on our FHLB advances was 2.34% and 2.72%
at December 31, 2019 and 2018, respectively, and the average tenor was 19 and 6
months for the same periods.
We must collateralize FHLB advances by pledging real estate loans or
investments. We pledge more assets than required by our current level of
borrowings in order to maintain additional borrowing capacity. Although we may
substitute other loans for such pledged loans, we are restricted in our ability
to sell or otherwise pledge these loans without substituting collateral or
prepaying a portion of the FHLB advances. At December 31, 2019, we had pledged
$4.13 billion of loans to the FHLB, against which we had borrowed $575.0
million.
Subordinated Debentures and Subordinated Notes Payable. Interest expense on our
outstanding junior subordinated debentures and subordinated notes payable was
$1.3 million in first quarter of fiscal year 2020 and $1.4 million in the
comparable period in fiscal year 2019, a decrease of $0.1 million, or 4.3%. The
weighted average contractual rate on outstanding junior subordinated debentures
was 4.13% and 4.93% at December 31, 2019 and 2018, respectively. The weighted
average contractual rate on outstanding subordinated notes was 4.88% at both
December 31, 2019 and 2018.
Rate and Volume Variances
Net interest income is affected by changes in both volume and interest rates.
Volume changes are caused by increases or decreases during the year in the level
of average interest-earning assets and average interest-bearing liabilities.
Rate changes result from increases or decreases in the yields earned on assets
or the rates paid on liabilities.
The following table presents for the current and comparable three month periods
a summary of the changes in interest income and interest expense on a tax
equivalent basis resulting from changes in the volume of average asset and
liability balances and changes in the average yields or rates compared with the
preceding fiscal year. If significant, the change in interest income or interest
expense due to both volume and rate has been prorated between the volume and the
rate variances based on the dollar amount of each variance.
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                                                               Current Quarter vs Comparable Quarter
                                                             Volume             Rate             Total
                                                                      (dollars in thousands)
Increase (decrease) in interest income:
Cash and cash equivalents                               $       (517)    $          584     $         67
Investment securities                                          2,494               (185)           2,309
Non-ASC 310-30 loans                                           1,513             (4,132)          (2,619)
ASC 310-30 loans                                                (489)               241             (248)
Loans                                                          1,024             (3,891)          (2,867)
Total increase (decrease)                                      3,001             (3,492)            (491)
Increase (decrease) in interest expense:
Interest-bearing deposits                                        391             (2,754)          (2,363)
Time deposits                                                   (384)               893              509
Securities sold under agreements to repurchase                    (9)               (17)             (26)
FHLB advances and other borrowings                             1,662               (526)           1,136
Subordinated debentures and subordinated notes payable             2                (61)             (59)
Total increase (decrease)                                      1,662             (2,465)            (803)

Increase (decrease) in net interest income (FTE) $ 1,339 $

(1,027) $ 312



Provision for Loan and Lease Losses
We recognized provision for loan and lease losses of $8.1 million for the first
quarter of fiscal year 2020 compared to a provision for loan and lease losses of
$5.2 million for the comparable period in fiscal year 2019, an increase of $2.9
million, or 55.4% between the periods. The increase was mainly driven by a
higher level of net charge offs between the periods, concentrated in the
agriculture and commercial non-real estate segments of the loan portfolio,
combined with an increase in specific reserves between the periods, concentrated
in the CRE and commercial non-real estate segments of the loan portfolio.
                                                                      Three 

Months Ended December 31,

                                                                        2019                       2018
                                                                          

(dollars in thousands) Provision for loan and lease losses, non-ASC 310-30 loans * $ 8,050

              $       5,600

Provision for (reduction in) loan and lease losses, ASC 310-30 loans

                                                                 53                       (385)
Provision for loan and lease losses, total                    $           8,103              $       5,215
* As presented above, the non-ASC 310-30 loan portfolio includes originated loans, other than loans for which
we have elected the fair value option, and loans we acquired that we did not determine were acquired with
deteriorated credit quality.


Total Credit-Related Charges
We recognized other credit-related charges during the quarter ended December 31,
2019 that were higher than the comparable period in fiscal year 2019. We believe
that the following table, which summarizes each component of the total
credit-related charges incurred during the current and comparable period, is
helpful to understanding the overall impact on our quarterly results of
operations. Net other repossessed property charges includes other repossessed
property operating costs, valuation adjustments and (loss) gain on sale of other
repossessed properties, each of which entered other repossessed property as a
result of the former borrower failing to perform on a loan obligation. Reversal
of interest income on nonaccrual loans occurs when we become aware that a loan,
for which we had been recognizing interest income, will no longer be able to
perform according to the terms and conditions of the loan agreement, including
repayment of interest owed to us, while a recovery of interest income on
nonaccrual loans occurs when we receive repayment of interest owed to us. Loan
fair value adjustments related to credit relate to the portion of our loan
portfolio for which we have elected the fair value option; these amounts reflect
expected credit losses in the portfolio.
                                                                       

Three Months Ended December 31,

                                     Included within F/S Line
              Item                           Item(s):                    2019                     2018
                                                                          

(Dollars in thousands) Provision for loan and lease Provision for loan and lease losses

                           losses                           $         8,103           $       5,215

Net other repossessed property Net loss on repossessed property charges

                          and other related expenses                   342                   3,063

Net reversal (recovery) of Interest income on loans interest income on nonaccrual loans

                                                                       2,006                     (41)
Loan fair value adjustment       Net increase in fair value of
related to credit                loans at fair value                        2,134                   1,184
Total                                                             $        12,585$       9,421


                                      43-
--------------------------------------------------------------------------------

Noninterest Income The following table presents noninterest income for the three months ended December 31, 2019 and 2018.

                                                                Three 

Months Ended December 31,

                                                                  2019                     2018
                                                                     (dollars in thousands)
Noninterest income
Service charges and other fees                             $        11,409$      11,689
Wealth management fees                                               2,964                   2,241
Mortgage banking income, net                                         1,612                   1,320
Net loss on sale of securities                                           -                    (513)
Other                                                                1,165                   1,084
Subtotal, product and service fees                                  17,150                  15,821

Net (decrease) increase in fair value of loans at fair value

                                                              (14,933)                 19,216
Net realized and unrealized gain (loss) on derivatives              13,516                 (18,317)
Subtotal, loans at fair value and related derivatives               (1,417)                    899
Total noninterest income                                   $        15,733$      16,720


Our noninterest income is comprised of the various fees we charge our customers
for products and services we provide and the impact of changes in fair value of
loans for which we have elected the fair value treatment and realized and
unrealized gains (losses) on the related interest rate swaps we utilize to
manage interest rate risk on these loans. While we are required under U.S. GAAP
to present both components within total noninterest income, we believe it is
helpful to analyze the two broader components of noninterest income separately
to better understand the underlying performance of the business.
Noninterest income was $15.7 million for the first quarter of fiscal year 2020
compared to $16.7 million for the same period in fiscal year 2019, a decrease of
$1.0 million, or 5.9%. Significant components of noninterest income are
described in further detail below.
Product and Service Fees. We recognized $17.2 million of noninterest income
related to product and service fees in the first quarter of fiscal year 2020, an
increase of $1.3 million, or 8.4%, compared to the same period in fiscal year
2019. The increase was due to a $0.7 million increase in wealth management fees
combined with a $0.5 million net loss on sale of securities in the prior period
compared to no loss on sale of securities in the current period. The increase in
wealth management fees was a result of the purchase and assumption of management
of trust assets in Colorado during the quarter.
Loans at fair value and related derivatives. As discussed in "-Analysis of
Financial Condition-Derivatives," changes in the fair value of loans for which
we have elected the fair value treatment and realized and unrealized gains and
losses on the related derivatives are recognized within noninterest income. For
the first quarter of fiscal year 2020, these items accounted for $(1.4) million
of noninterest income compared to $0.9 million of noninterest income for the
same period in fiscal year 2019. The change was driven by a $0.9 million
increase in the current cost of interest rate swaps due to changes in the
interest rate environment and a $1.9 million decrease in swap fees, partially
offset by a net favorable change in the credit risk adjustment of $0.5 million.
We believe that the current realized loss on the derivatives economically
offsets the interest income earned on the related loans. We present elsewhere
the adjusted net interest income and adjusted net interest margin reflecting the
metrics we use to manage the business.
Noninterest Expense
The following table presents noninterest expense for the three months ended
December 31, 2019 and 2018.
                                                                 Three Months Ended December 31,
                                                                   2019                     2018
                                                                      (dollars in thousands)
Noninterest expense
Salaries and employee benefits                              $        35,905$      34,770
Data processing and communication                                     5,773                   5,278
Occupancy and equipment                                               5,093                   5,126
Professional fees                                                     3,764                   3,288
Advertising                                                             865                     938
Net loss on repossessed property and other related expenses             342                   3,063
Other                                                                 5,188                   4,643
Total noninterest expense                                   $        56,930$      57,106


                                      44-
--------------------------------------------------------------------------------

Our noninterest expense consists primarily of salaries and employee benefits,
data processing and communication, occupancy and equipment, professional fees
and net loss on repossessed property and other related expenses. Noninterest
expense was $56.9 million in the first quarter of fiscal year 2020 compared to
$57.1 million for the same period in fiscal year 2019, a decrease of $0.2
million, or 0.3%. This decrease was driven by a $2.7 million decrease in net
loss on repossessed property and other related expenses, partially offset by a
$1.1 million increase in salaries and employee benefits and a $0.5 million
increase in data processing and communication expense. The decrease in net loss
on repossessed property and other related expenses was due to a write down of
one large property in the prior period. The increase in salaries and employee
benefits was due mainly to annual merit increases in the current period. The
increase in data processing and communication expense is due to higher annual
licensing costs in the current quarter.
Our efficiency ratio was 46.2% and 46.1% for the first quarter of fiscal years
2020 and 2019, respectively. For more information on our efficiency ratio,
including a reconciliation to the most directly comparable GAAP financial
measures, see "-Non-GAAP Financial Measures" section.
Provision for Income Taxes
The provision for income taxes varies due to the amount of taxable income, the
level and effectiveness of tax-advantaged assets and tax credit funds and the
rates charged by federal and state authorities. The provision for income taxes
of $12.6 million for the first quarter of fiscal year 2020 represents an
effective tax rate of 22.5% compared to a provision of $13.5 million, or an
effective tax rate of 22.8%, for the comparable period of fiscal year 2019.
Return on Assets and Equity
The following table presents our return on average total assets, return on
average common equity and return on average tangible common equity for the dates
presented.
                                                                    Three Months Ended December 31,
                                                                    2019                        2018
Return on average total assets                                            1.34  %                    1.48  %
Return on average common equity                                            9.0  %                    10.0  %
Return on average tangible common equity ¹                                15.0  %                    17.1  %
1 This is a non-GAAP financial measure we believe is helpful to interpreting our financial results. For more
information on this non-GAAP financial measure, including a reconciliation to the most directly comparable
GAAP financial measure, see "-Non-GAAP Financial Measures" section.

© Edgar Online, source Glimpses

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